|
Cost Segregation
|
|
 What is Cost Segregation?
Cost segregation is a front loaded depreciation technique employed by property owners and investors to accelerate their tax savings. Real estate property owners who own a business or rental property benefit most from cost segregation.
 How Does Cost Segregation Work?
Cost segregation works by reclassifying certain improvements into shorter recovery period for tax write offs.
A cost segregation study is normally performed by an engineering consultant that separates improvements from the actual property itself, thereby reducing the recovery period, for example, from 39 years for a commercial property to a shorter recovery period. The following are typical recovery periods for various improvements:
| DESCRIPTION |
RECOVERY PERIOD |
EXAMPLE OF IMPROVEMENTS |
| Personal Property |
5-7 years
|
Power Generators, HVAC, cabinets, window treatments, etc. |
| Land Improvements |
15 years
|
Sidewalks, fences, parking lots, etc. |
| Residential Building |
27.5 years
|
Single family homes, townhomes, condo, apartments, etc. |
| Commercial Building |
39 years
|
Office, retail, industrial warehouse, medical, hotel, etc. |
| Land |
Not depreciable
|
Land is not depreciable. |
What Are the Advantages and Disadvantages of Cost Segregation?
| ADVANTAGES |
DISADVANTAGES |
| Tax savings |
Cost of engineering study can be high
|
| Write off of tax basis when component is replaced or damaged |
Tax code recapture provisions when the property is sold
|
| Cost of engineering analysis for business entity is deductible as business expense |
Penalties for tax payers that understate cost segregation too aggressively
|
| Potential lower annual real estate taxes |
|
| Potential lower local transfer taxes |
|
What Are Some of the Areas Cost Segregation Apply To?
| COST SEGREGATION APPLICATION AREAS |
| New Construction |
| Existing Structure |
| Renovation |
| Remodeling |
| Restoration |
| Expansion |
| Property placed in business several years ago |
| Each property owner can have a separate cost segregation study |
How Do I Get Started With Cost Segregation?
| STEP |
PROCEDURE |
| 1 |
Contact a CPA to understand the ramifications of the tax sequences. A good CPA will provide planning and projections on potential tax savings based on a particular tax situation.
|
| 2 |
Hire a certified and qualified engineering consultant to conduct cost benefit analysis.
|
| 3 |
Have CPA collaborate with engineering consultant to provide evaluation on engineering study methodologies to minimize IRA challenges.
|
| 4 |
Contact The Ivy Group and we will provide you with experienced CPAs and engineering consultants.
|
|
